Lendlease Global Commercial Reit

Lendlease Global Commercial Reit ("Lendlease Global REIT") is offering 387,474,987 Units for the IPO at $0.88 per unit. The IPO will close on 30 Sep 2019 at 12pm and start trading on 2 Oct 2019 at 2pm. The number of units for public tranche is only 22.727m (meaning just $20m in value). Based on the IPO price, the market cap will be S$1.56 billion.

About Lendlease Global REIT

Lendlease Global REIT is established to invest in a diversified portfolio of income producing real estates globally in the retail and office sectors. 

About the Sponsor - Lendlease Corporation Limited

The Sponsor is part of the Lendlease Group, a leading international property and infrastructure group listed on the ASX, with operations in Australia, Asia, Europe and Americas. Lendlease Group currently operates in 8 countries, which it believes to be most resilient and stronger performing. Lendlease Group is one of the largest developers in the world, with a global development pipeline value approaching A$100 billion.

As you can see from the snapshot below, Lendlease Group has a market cap of A$10b and is trading at a PE ratio of 21.7x. (To contrast, Capitaland has a market cap of S$17b and trading at PER of 9x)

The Lendlease Group has a portfolio of 21 urbanisation projects across 10 Gateway Cities,

some of which include: Barangaroo South (Sydney, Australia), Melbourne Quarter
(Melbourne, Australia), Paya Lebar Quarter (Singapore), The Exchange TRX (Kuala Lumpur,
Malaysia) and Milano Santa Giulia (Milan, Italy). 

If you ask me why there is such strong interest in this IPO by cornerstone investors, it is most likely due to the strong sponsorship of Lendlease, where more assets are likely to be injected into this REIT in future. I am glad they have chosen Singapore as the listing venue.

There are many pages of Right of First Refusal ("ROFR") Agreement in the prospectus. Basically it means that if conditions are met, Lendlease Global Commercial Trust will be given a ROFR on the properties owned by Lendlease Group in the office or retail sectors.

IPO Portfolio properties

There are currently two properties in the initial portfolio :

• 99 year leasehold interest in 313@somerset in Singapore
• Freehold interest in Sky Complex located in Milan, Italy

The Grade A office building is located in Milan Metropolitan Area. I have been to Milan several times and i like that city. According to the prospectus, Milan is Europe's 4th largest economy and has an attractive office market.

The office building is located 5km from the CBD and well connected by subway, high speed and airport. The building is 100% leased to Sky Italia, an Italian satellite TV station owned by Comcast Corporation - the second largest broadcasting and cable TV company in the world by revenue. It has a single long term (12 + 12 year) lease since 2008 with an annual rental "step-up" structure that tracks ISTAT CPI Index. You can assess the August CPI movements here. I know how the step-up feature works but i am not sure if it will adjust downwards if the index variation is downwards.

While the depreciating Euros may be a concern to some, i always feel that foreign properties cut both ways and can provide some diversification as well.  

While the mall is well connected and sitting above Somerset MRT on Orchard Road, I personally don't really like to shop at 313 Somerset and can count the number of times i visited the mall.

I also don't like the fact that it is leasehold in nature (99 years old) - old mindset but they are similar in status to buildings owned by Starhill Global (Ngee Ann and Wisma) and SPH REIT (Paragon) a few blocks away.

The lease expiry of tenant in 313@Somerset is show below with 12.2% of the existing leases expiring in FY2020 and FY2021. The occupancy rate is around 99.6%. The lease usually comprise a base rent and "turnover" rent - calculated as a % of tenant's gross turnover. 58.9% of the leases have step up structures for FY2020, with average rental escalation of 3%, providing stable and growing rental income stream.

The IPO Portfolio has a very strong occupancy rate - this also means that it is already operating at "maximum" capacity.

The beauty of the rental structure is the "rental escalation" clauses built into the rental agreement. This is only possible if there is pricing power by the landlord. It will also depend on the rental prices in surrounding buildings. With the lack of new supply coming up in Orchard Road, my guess will be the rental prices is likely to remain stable.

The tenant bases is well diversified with the exception of Sky Italia. On that count, Sky Italia signed a a long term contract (12 + 12) years with built in escalation based on inflation index. It is a high quality tenant with no "bad debt" issue as of now.

Forecast P&L

The forecast is presented below. You can see that the yield is rise from 5.8% to 6% in FY2019 and FY2020. However, you can also see a distribution adjustments (footnote 3) that boost the amount available for distribution. This comprise 100% of the Manager Base Fee, Performance Fee, net change in fair value that will be paid in Units.

Distribution Yield and Policy

The first period will be from Listing Date till 31 Dec 2019 and the distribution will take place in Q1 2020. The distributions will take place every 6 months thereafter.

Peers Analysis

I have chosen malls that are close to 313@somerset as peers and that includes Starhill Global and SPH REIT and Frasers Centerpoint Trust. I have also included Capitamall as they own Plaza Singapura and many malls in Singapore.

You can see that Starhill Global is pulling the average down (meaning it offers better value) than Lendlease whereas investors in Capitamall and SPH should "switch out" of their investments into Lendlease. At 5.8% and projected to grow to 6%, i believe Lendlease is attractively priced.

Assuming a fair value range of 5 to 5.5% and price to book of 1.15x to 1.25x price to book, the fair value range will be between $0.93 to $1.

What i like about Lendlease Global Commercial REIT

• Strong Sponsor - The Sponsor is reputable and well regarded in this sector. The fact that it has set up the REIT for both retail and commercial properties bode well for investors. It means that the Sponsor is not seeking to launch multiple REITs
• Quality Cornerstone investors - Separate from the offering, the quality list of Cornerstone Investors include Blackrock, Fullerton, Lion Global, Nikko Asset Management. They will subscribe for an aggregate 453.785m units.
• "Fair valuation" - in a world of inflated assets, it is priced fairly in terms of both "yield" and price to book relative to its peers. If Lendlease Group makes the REIT its main REIT vehicle (as intended by the ROFR), i believe it will rival capitamall Trust one day. The projected yields are attractive in today's yield environment

Some of my concerns

• Price to book of 1.08x - In a world of bubbling assets valuation, Lendlease "maxed out" its valuation for the IPO. The NAV per share is around 81.34 cents compared to the IPO price of 88 cents. However, if you compare the valuation against its peers, it is relatively "cheaper"
• Environment in Europe is uncertain - The political and economic environment in Europe is uncertain, especially those in Italy. The Euro may weaken further against major currencies.
• Trump is getting crazy - In the worst case scenario, Trump will likely escalate the trade wars and delist China companies in US and it is the uncertainties which market dislike. A global market recession is on the cards?

Mr IPO Chilli Ratings

My own view is that Lendlease Global Commercial REIT is attractively priced in terms of both yield and valuation. The low interest rate environment and volatile markets means that REITs will continue to be favored by investors seeking to invest in real hard assets.  That coupled with a strong sponsor means that this IPO is a 3 Chilli rating for me.  

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